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Helping you keep more of your income
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Adrian Mooy & Co
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Contractors - Best Salary & Dividends
Buy, Hire Purchase or Lease?
Tax Efficient Profit Extraction
If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can support you through business registration and provide advice on all aspects of tax including:
◦ Accounts for HMRC ◦ Self assessment ◦ VAT returns ◦
◦ Payroll services ◦ Tax planning ◦
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
We are a member firm of the Association of Chartered Certified Accountants.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time.
Self assessment: Taking
away the hassles of tax
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is tax efficient. We will advise you on how to structure your contract to minimise IR35 risk. We will ensure you claim all the expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns and provide you with clarity over your tax payments.
Included in the service • IRIS KashFlow + Snap • Annual accounts • Corporate tax return • Personal tax return • Payroll • Dividend administration • VAT returns • Contract reviews • Dealing with HMRC
VAT • is one of the most complex tax regimes imposed on business. We provide a cost effective service including assistance with registration & completing your returns.
Payroll • Administering your payroll can be time consuming. We provide a comprehensive payroll service.
Your Payroll Solution
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Provision of management accounts
For more about these services please contact us.
Keeping the Books
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax, accounts preparation & tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively.
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a free meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
Build a relationship
Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.
Confirm your expectations
Our aim is to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.
Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.
Understand your needs
Confirm your expectations
Build a relationship
Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time. Eddie Morris
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Inheritance tax – making tax-free gifts
There are various exemptions, and potential exemptions, which make it possible to make gifts free of inheritance tax. Making tax-free gifts is a useful way to reduce the value of your estate – and ultimately the inheritance tax that may be payable on gifts.
What counts as a gift? - For inheritance tax purposes, a gift is anything that has value, for example, money, property or possessions. A gift may also arise if the value of your estate is reduced following a transfer, for example, if you sell your house to your children for less than it is worth; the discount element is regarded as a gift.
Gifts to spouses - Gifts to spouses and civil partners are free of inheritance tax.
Gifts out of income - The inheritance tax exemption for ‘normal expenditure out of income’ is very useful and can be used to make tax-free lifetime gifts. For the exemption to apply, the gift must meet three conditions:
An easy way to use this exemption, for example, would be to set up a standing order for a regular amount, say £X per month, to your children or grandchildren, or to meet the cost of school fees or similar.
Gifts made in this way are completely exempt – you do not need to survive seven years to keep the gifts tax-free.
Annual gifts exemption - There is an annual gifts exemption for inheritance tax which allows you to give away £3,000 of gifts in total IHT-free in each tax year. If the exemption is not used in full in one tax year, the unused amount can be carried forward to the following year, after which it is lost if it is not used.
Wedding gifts - Tax-free gifts can also be made, up to certain limits, on the occasion of a marriage or civil partnership. The tax-free limit for wedding gifts is £5,000 where the gift is to a child of yours, £2,500 where it is to a grandchild and £1,000 where the gift is to someone else.
Small gifts - It is also possible to give gifts of up to £250 per year IHT-free to as many people as you like, as long as the recipient has not benefited from another exemption.
Other tax-free gifts - Gifts to help another person with their living costs, such as an elderly relative or a child under the age of 18 can be made free of inheritance tax, as can certain gifts to charities and political parties, housing associations, gifts for national purpose and for the public benefit.
Potentially exempt transfers - You can also give as much as you like away IHT-free – as long you survive seven years. However, there are anti-avoidance rules where you have previously owned an asset or where you continue to retain the benefit of it after you have given it away (for example, if you give your house to your children and continue to live in it rent-free), and care must be taken not to fall foul of these.
If you survive less than three years after making the gift, IHT is payable in full at the usual 40% rate. However, if you survive more than three years but less than seven years from the date of the gift, taper relief reduces the amount of IHT payable. If you survive at least seven years from the date of the gits, it drops out of account and is IHT-free.
Free fuel – is it worthwhile?
Where an employer meets the cost of fuel for private journeys in a company car, an additional benefit in kind charge arises in respect of the provision of the `free’ fuel (unless the employee makes good all the cost).
Working out the fuel benefit charge
The fuel benefit charge is found by multiplying the appropriate percentage (based on the level of the car’s CO2 emissions) used in working out the company car benefit charge, including the diesel supplement where appropriate, by the multiplier for the tax year in question.
For 2018/19, the multiplier is £23,400.
Tax cost of free fuel
For 2018/19, the appropriate percentage ranges from 13% for cars with CO2 emissions of 0 –50g/km to 37%. Consequently, the cash equivalent of the fuel benefit ranges from £3,042 (£23,400 @ 13%) to £8,658 (£23,400 @ 37%).
For a basic rate taxpayer, the tax cost of free fuel ranges from £608.40 (20% of £3,042) to £1,731.60 (20% of £8,658); for a higher rate taxpayer, the tax cost ranges from £1,216.80 (40% of £3,042) to £3,463.20 (40% of £8,658).
Is it worthwhile?
Free fuel is expensive. If it is paid in relation to a company car with a list price of less than £23,400, for 2018/19, more tax will be payable on the provision of `free’ fuel than on the provision of the car.
Whether the provision of fuel constitutes a perk will depend on how much private mileage the employee undertakes in the tax year, the cost of fuel, the appropriate percentage for the car and the rate at which the employee pays tax. In many cases, unless the appropriate percentage is low and private mileage is high, free fuel will not be much of a perk.
An employee has a company car with CO2 emissions of 145g/km. For 2018/19 the appropriate percentage is 30%. If fuel is provided for private motoring, the associated fuel benefit is £7,020, which if the employee is a higher rate taxpayer will cost him £2,808 in tax.
Assuming that petrol costs £127p per litre and the driver achieves 6 miles per litre, the driver would have to drive 13,266 private miles in the tax year to break even. This is the level at which the cost of fuel (13,266/6 x 127p) is the same as the tax on the fuel benefit.
If private mileage is less than 13,266 miles per year, it would be cheaper for the employee to give up free fuel and pay for the petrol himself. If the private mileage is higher, the free fuel will be a perk as the tax paid on the benefit will be less than the cost of the fuel.
It is advisable to do the sums to see if free fuel is actually worthwhile.
If a cash alternative is available, this may be preferable, particularly if private mileage is low. However, be aware that the alternative valuation rules may bite if a cash alternative if offered.
Dividend income – How is it taxed in 2018/19?
The taxation of dividend income was reformed from 6 April 2016. Since that date, dividends are paid gross – there is no longer any associated tax credit – and all taxpayers receive a dividend allowance. Dividends not sheltered by the dividend allowance, or any available personal allowance, are taxed at the appropriate dividend rate of tax.
The ‘dividend allowance’ is available to all taxpayers, regardless of the rate at which they pay tax and unlike the savings allowance the amount of the dividend allowance is the same regardless of the tax bracket into which the recipient falls. Where the allowance is not otherwise utilised, it allows for tax-efficient extraction of profits from a family company.
Although termed an ‘allowance’ the dividend is really a zero-rate band, with dividends covered by the allowance being taxed at a rate of 0% (the ‘dividend nil rate’). Significantly, dividends covered by the allowance form part of band earnings.
The dividend allowance is set at £2,000 for 2018/19; a reduction of £3,000 from the £5,000 dividend allowance that applied for the two previous tax years. Assuming dividends of at least £5,000 are paid in 2017/18 and 2018/19, the reduction in the dividend tax allowance will increase the tax payable by £225 for basic rate taxpayers, by £975 for higher rate taxpayers and by £1,143 for additional rate taxpayers.
Top slice of income
Dividend income is treated as the top slice of income. This determines which band it falls in, and the rate at which it is taxed.
Dividend tax rates
Dividend income has its own tax rates. Dividend income is taxed at 7.5% (the ‘dividend ordinary rate’) to the extent that it falls in the basic rate band, at 32.5% (the ‘dividend higher rate’) to the extent that it falls in the higher rate band, and at 38.1% (the ‘dividend additional rate’) to the extent that it falls in the additional rate band.
For 2018/19, the basic rate band covers the first £34,500 of taxable income. The additional rate band applies to taxable income in excess of £150,000. The bands are UK wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
If the personal allowance has not been fully used elsewhere, bearing in mind dividend income has the last call, any unused portion of the allowance can be set against dividend income. The personal allowance is £11,850 for 2018/19, although it is reduced by £1 for every £2 by which income exceeds £100,000.
In 2018/19, Frances receives a salary of £25,000 and dividends of £30,000. Her personal allowance of £11,850 and the first £13,150 of her basic rate band is used by her salary, on which she pays tax of £2,630.
The first £2,000 of her dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of her basic rate band, leaving £19,350 available (£34,500 - £13,150 - £2,000). The next £19,350 of dividends is taxed at the dividend ordinary rate of 7.5% and the remaining £8,650 (£30,000 - £2000 - £19,350) is taxed at the dividend higher rate of 32.5%.
The tax payable on her dividends is therefore £4,262.50 ((£2,000 @ 0%) + (£19,350 @ 7.5%) + (£8,650 @ 32.5%)).
Having an alphabet share structure in a family company allows dividends to be paid to family members to take advantage of their dividend allowance to extract profits tax-free.
Tax code changes for 2018/19
Tax codes are the lynchpin of the PAYE system – unless the tax code is correct, the PAYE system will not deduct the right amount of tax from an employee’s pay.
The tax code determines how much pay an employee may receive before they pay any tax. The most straightforward scenario is that the person receives the personal allowance for that year. The code is then the personal allowance for the year with the last digit omitted and an `L’ suffix. So, for 2017/18, the personal allowance is £11,500 and the associated tax code is 1150L. This is also the emergency tax code.
Other codes - Employees’ situations vary and consequently different codes are needed to accommodate that. If an employee has more than one job, his or her allowances may be used up in job 1, leaving all the pay for job 2 to taxed. The 0T code – no allowances – accommodates this. A person may also have an 0T code if their personal allowance has been fully abated (at £123,000 for 2017/18 and £123,700 for 2018/19). An employee may have all his or her pay taxed at the basic rate, for which the relevant code is BR, or at the higher rate (code D0), or the additional rate (code D1). Code NT indicates that no tax is to be deducted.
Scottish taxpayers have an S prefix, indicating the Scottish rates of tax should be used.
Marriage allowance - Where one partner in a marriage or civil partnership is unable to use their personal allowance, they can transfer 10% of their personal allowance to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer. The person surrendering 10% of their allowance has a code with a `N’ suffix, whereas the recipient has an `M’ suffix’.
Adjustments - Tax underpayments or the tax due on benefits in kind may be collected through the PAYE system. The tax code is based on the net amount of the allowances less deductions. So, for example, if in 2017/18 a person had a personal allowance of £11,850 and a company car with a cash equivalent of £5,000, the net allowance due is £6,500 and the associated tax code would be 650L.
Where deductions exceed allowances, a person has a K prefix code – in this scenario, they do not have any free pay and are treated as if they have received additional taxable pay.
2018/19 updating - Tax codes need to be updated each year to reflect changes in allowances. The personal allowance is increased to £11,850. Where the employer does not receive a form P9(T) or an electronic notice of coding for an employee, the following changes should be made to update an employee’s tax code for the 2018/19 tax year:
Any week one or month one markings should not be carried forward.
Codes BR, SBR, D0, SD0, D1, SD1 and NT can be carried forward to 2018/19.
The emergency code for 2018/19 is 1185L.
If a new code has been notified on form P9(T) or electronically, that should be used instead.
The updated codes should be used from 6 April 2018 onwards.
Employment allowance – have you claimed it?
The employment allowance is a National Insurance allowance which is available to qualifying employers. The allowance reduces employers’ (secondary) Class 1 National Insurance by up to the £3,000.
The allowance is set at £3,000 or, if lower, the employers’ secondary Class 1 bill for the tax year.
Who can claim?
Most employers, whether a company or an unincorporated business, are able to claim the employment allowance if they are paying employers’ Class 1 National Insurance contributions. However, if there is more than one PAYE scheme, a claim can only be made for one of them.
Who can’t claim?
The main exclusion is for companies, such as personal companies, where the sole employee is also a director. However, the allowance can be preserved if the sole employee is not also a director, or if the business has more than one employee.
Remember to claim
The employment allowance is not given automatically and must be claimed. This is done via the payroll software through RTI. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year.
Using the allowance
The allowance is set against the employers’ Class 1 National Insurance liability for the tax year until it is used up, reducing the amount that the employer needs to pay over to HMRC.
If the employers’ NIC bill for the year is less than £3,000, the unused amount cannot be carried forward or set against other liabilities. The allowance is capped at the employers’ Class 1 NIC bill for the year. It cannot be set against Class 1A or Class 1B liabilities, or against employees’ NIC.
Private lettings relief
Lettings relief potentially shelters some of the gain from capital gains tax on the disposal of a property which has been an only or main residence at some point during the period of ownership and which has also been let out.
Where a residence has been occupied as an only or main home, private residence relief exempts from capital gains tax not only the period for which the property was so occupied, but also the last 18 months of ownership. Where the property is let, to the extent that the letting falls outside the last 18 months of ownership, private residence relief is not available for that period. However, lettings relief may be.
Availability of lettings relief
Lettings relief is available where a gain arises on the disposal of a property which:
• at some time has been the individual’s only or main residence;
• during the period of ownership, all or part of the property has been let as residential accommodation; and
• a chargeable gain arises as a result of the letting.
Amount of the relief
The amount of the relief is the lowest of the following three amounts:
1. the amount of private residence relief;
2. £40,000; and
3. the amount of the chargeable gain arising as a result of the letting.
Rose buys a cottage on 1 January 2012 for £200,000 and lives in it as her only or main residence until 30 June 2015. She then moves in with her boyfriend and lets the cottage out. The cottage is sold for £350,000 on 30 June 2018.
The gain on the sale of the property is £150,000.
The property is owned for 6 years and 6 months (78 months).
She lived in it as her main residence for 3 years and 6 months (42 months).
Private residence relief is available for the period in which she occupied the property as her main residence and the final 18 months – a total of 60 months (42 months + 18 months).
The gain eligible for private residence relief is 60/78 x £150,000 = £115,385.
The gain attributable to the let period is the remainder of the gain, i.e. £34,615 (£150,000 - £115,385).
Lettings relief is the lower of:
1. £115,385 (gain eligible for private residence relief);
2. £40,000; and
3. £34,615 (gain attributable to the letting).
As a result of the lettings relief, the full gain is exempt from tax; £115,385 being sheltered by private residence relief and the remaining £34,615 being sheltered by lettings relief.
Living in a let property as a main residence for a period of time can be very beneficial. Not only does it shelter any gain for the period for which it was occupied as such, it also shelters the gain for the last 18 months and brings lettings relief to the table.
Rent-a-room: New restrictions
Rent-a-room relief offers the opportunity to enjoy rental income of up to £7,500 tax-free from letting out a room in your own home. It does not matter whether you own or rent your home; what is important is that the let is of furnished accommodation in your own home.
How the relief works
The relief is automatic where the rental income is less than the threshold. If you are the only person receiving income from the let, the threshold is £7,500; where one or more other people receive income, the threshold is halved so each person can receive up to £3,750 tax-free (this is the case regardless of how many people receive income from the let).
Rental income more than the threshold
If the rental income exceeds the threshold, you can opt into the scheme and pay tax on the excess.
Not always the best option
Claiming rent-a-room relief will not always be the best option. For example, if rental income is more than the threshold, and expenses are also more than the threshold, computing rental profit in the normal way will give a lower taxable amount.
It will also be beneficial to opt out of rent-a-room if you make a loss, otherwise the benefit of the loss is lost and cannot be carried forward for offset against future rental profits.
Rent-a-room relief was introduced to boost the supply of low-cost residential accommodation. In light of concerns that it was providing an unintended benefit to those offering short-term lets through sites such as Airbnb, the relief is to be amended.
To ensure that the relief is used as originally intended, i.e. to encourage the availability of rooms for lodgers, a new shared occupancy test will apply from 6 April 2019.
Shared occupancy test
Under the shared occupancy test, the individual in receipt of the income (or a member of their household) must have a ‘shared occupancy’ for all or part of the period of the let. The draft legislation requires that the physical use of the accommodation by the tenant must overlap with the use of the residence as sleeping accommodation by the landlord or a member of his or her household. It should be noted that another tenant does not count as a member of the household for the purposes of satisfying the test.
The legislation does not, however, specify a minimum period of overlap – there is no requirement for the landlord to be present for the whole let and, indeed, under the legislation as drafted, a period of overlap of only one night would be sufficient to ensure this test is met.
In 2019, the Jones family let out their house for the Wimbledon fortnight and holiday in Tuscany for the entire period of the let. Their neighbours, the Smiths, let out three rooms for the Wimbledon fortnight, but remain at home for the first three days before joining the Jones’ in Tuscany. The Smiths meet the new shared occupancy test, but the Jones family do not.
No Minimum Period of Occupation Needed for Main Residence
Main residence relief (private residence relief) protects homeowners from any gains arising on their only or main home. However, there are conditions to be met for the relief to be available. One of the major ones is that the property is at some time during the period of ownership occupied as the owner’s only or main home. Where this is the case, the period of occupation as a main home is sheltered from capital gains tax, as is the final 18 months of ownership, regardless of whether the property is occupied as a main home for that final period.
Living in a property for a period of time is worthwhile to secure main residence relief, not least because doing so has the added benefit of sheltering any gain that arises in the last 18 months of ownership.
But, how long does the property have to be occupied as a main residence to trigger the protective effects of the relief?
Quality not quantity
A recent decision by the First-tier tax tribunal confirmed that there is no minimum period of residence that is needed to secure main residence relief – what matters is that there has been a period of residence as the only or main home.
The case in question concerned a taxpayer who ran a property development company and who purchased a property in which he intended to live in as a main home. The property was initially purchased through the company, but the taxpayer intended to obtain a mortgage to buy it from the company. He lived in the property for a period of two and a half months whilst trying to sort out his finances. As a result of the financial crash, he was only able to secure a buy-to-let mortgage, the terms of which precluded him living in the property. The property was let to a friend, but the taxpayer moved in briefly following the friend’s death and undertook some decorating with a view to moving back in with his family. Due to health problems, this did not happen and the property was sold, realising a gain.
The Tribunal found that the taxpayer had lived in the property as a main home, albeit for a short period. It was the quality of occupation, not the quantity, that was important. Consequently, main residence relief was available.
Where a person owns a second home, living in it as a main residence, even if only for a short period, can be beneficial. This will protect not only the gain relating to the period of occupation from capital gains tax but also the last 18 months.
Partner note: TCGA 1992, s. 222; Stephen Bailey v HMRC TC06085.
Are your workers employees?
Employee status continues to be in the spotlight. The Government are consulting on proposals to address non-compliance with the off-payroll working rules in the private sector. Earlier in the year they consulted on employment status, including the possibility of introducing a statutory employment status test.
It is important that the status of workers is correctly assessed as this will affect the tax and National Insurance that the worker pays, and consequently the state benefits to which they may be entitled, and also the extent to which they are able to benefit from employment rights. It will also determine whether the engager must operate PAYE and pay employer’s National Insurance contributions.
Current approach - While change is likely, under the current rules there is no single test that determines whether a worker is an employee or is self-employed. Rather it is a case of looking at the characteristics of the engagement and standing back and seeing whether the picture that emerges is one of employment or self-employment.
Employee v self-employed - An employee works under a contract of service whereas a self-employed person enters into a contract for service.
The following summarises some of the key indicators of employment and self-employment.
The employer is obliged to provide work and the worker is obliged to do it.
The worker must work regularly unless on leave.
The worker is required to work a minimum number of hours at set times.
The worker must do the job personally.
The worker is supervised and told what work to do.
The worker is entitled to paid holiday.
The worker is entitled to join the workplace pension scheme.
The worker receives employment-type benefits.
The worker is given the tools and equipment needed to do the job.
The employer deducts PAYE and NI contributions from the employee’s pay.
The worker is `part and parcel’ of the organisation.
The worker is included in company social events, such as the staff Christmas party.
The worker is in business on their own account.
The worker bears the financial risk.
The worker is generally paid a price for the job, regardless of how long it takes.
The worker does not have to do the work personally and can send a substitute.
The worker can decide when and how to do the job.
The worker does not get paid while on holiday.
The worker decides what jobs to take on.
The worker is responsible for correcting unsatisfactory work and bears the cost of this.
The worker provides the tools and equipment needed to do the job.
Marginal cases - It will often be clear cut as to whether a worker is employed or self-employed and the characteristics of the engagement will fall securely into one camp or the other. However, this will not always be the case; in marginal cases, the worker may exhibit characteristics of each. In such case, HMRC produce a ‘Check Employment Status Tool’ (CEST), which can be used to help reach a decision.
How to choose your main residence to maximise relief
Private residence relief (also known as main residence relief) takes the gain arising on the disposal of a person’s main or only residence out of the charge to capital gains tax. This relief means that in the majority of cases, any gain arising when a person sells their home is tax-free.
However, as with any relief, there are conditions. Relief is available for a property that is, or has been at some point, the individual’s only or main home. Where the property meets this criteria throughout the period of ownership (and assuming it has not been used partially for business), the whole gain arising on the disposal of the residence is tax-free. Where the property has not been the main residence throughout, the gain is apportioned. However, as long as it has been the home at some point, the gain relating to the last 18 months of ownership is exempt. If the property has been let at any time, letting relief may further reduce the chargeable gain.
More than one home
For the purposes of the relief a person can only have one main residence at any one time. Where a person has more than one residence, they can choose which one is the main one – this can be useful in mitigating future tax bills.
A property can only be a main residence if it is in fact a residence. Broadly, this is a property which someone occupies as their home. A property which is let, such as a buy to let property, does not count as it is not occupied by the taxpayer as his or her home. However, a city flat in which a taxpayer spends the week, and a family home elsewhere would both count as residences, as would a property in this country in which a person spends the summer and a property abroad in which they spend their winter.
Choosing the main residence
A person can elect which of their residences is their main residence by writing to HMRC. The deadline is two years from the date on which the combination of residence changes. In a simple case where a person acquires a second home, this will be two years from the date on which the second home was acquired.
If no election is made, the home which is the main home is a question of fact – and will be the home that the person spends most of their time, where their family is based etc.
Where a person has more than one residence it is beneficial for each of them to be the main residence at some point. At the very least, this will shelter the gain relating to the period of occupation as a main residence and the last 18 months. Where a property has been let, making it the main residence for a period also opens up the opportunity of letting relief to further reduce the gain. The period as a main residence can be after the period of letting.
Flipping the main residence can be very beneficial – however, the property must be occupied as a residence. The election can only be made on paper and all owners must sign.
Mileage allowances – what is tax-free
Employees are often required to undertake business journeys by car, be it their own car or a company car, and may receive mileage allowance payments from their employer. Up to certain limits, mileage payments can be made tax-free. The amount that can be paid tax-free depends on whether the car is the employee’s own car or a company car.
Employee’s own car
Where an employee uses his or her own car for work, under the approved mileage allowance payments (AMAP) scheme, payments can be made tax-free up to the approved amount. The rates for cars (and vans) are set at 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles. A rate of 24p per mile applies to motorcycles and a rate of 20p per mile applies to bicycles.
Jack frequently uses his car for work and in the 2017/18 tax year he undertakes 13,420 business miles.
Under the AMAP scheme, the approved amount is £5,355 ((10,000 miles @ 45p per mile) + (3,420 miles @ 25p per mile)).
Amounts up to the approved amount can be paid tax-free and do not need to be reported to HMRC.
Where the mileage allowance paid is more than the approved amount, the excess over the approved amount is taxable and must be reported to HMRC on form P11D in section E.
The facts are as in example 1 above. Jack is paid a mileage allowance by his employer of 50p per mile.
The amount paid of £6,710 (13,420 miles @ 50p per mile) is more than the approved amount of £5,355, therefore the excess over the approved amount (£1,355) is taxable and must be reported on Jack’s P11D (unless his employer has opted to payroll the benefit).
Where the mileage allowance paid is less than the approved amount, the employee can claim tax relief for the shortfall, either in his or her tax return or on form P87.
For NIC, the 45p per mile rate is used for all business miles in the tax year, not just the first 10,000 miles.
Beware salary sacrifice
The value of tax exemption is lost if the mileage payments are made under a salary sacrifice or other optional remuneration arrangement, and instead the employee is taxed on the amount of salary foregone where this is higher.
Where an employee has a company car, the AMAP scheme does not apply. However, mileage payments can still be made tax-free, but at the lower advisory fuel rates. These are updated quarterly and the rate which can be paid tax-free depends on the engine size of the car and fuel type. The rates are available on the Gov.uk website at www.gov.uk/government/publications/advisory-fuel-rate.
As with the AMAP rates, where the amount paid is in excess of the advisory rate, the excess is taxable.
Rewarding staff suggestions in a tax-free manner
Staff suggestion schemes reward employees where a suggestion saves money. The tax system allows suggestion scheme awards to be made tax-free. The tax exemption recognises two types of award:
Encouragement awards - An encouragement award is an award other than a financial benefit award for a suggestion with intrinsic merit or showing special effort.
Financial benefit awards - This is for a suggestion relating to an improvement in efficiency which the employer adopts & expects will result in financial benefits.
Conditions - The tax exemption applies where an employer establishes a scheme for the making of suggestions which is open on the same terms to employees of the employer generally or to a particular description of them, eg. all employees at a site or department.
The following conditions must also be met:
• the suggestion relates to activities carried on by the employer,
• the suggestion is made by an employee who could not reasonably be expected to make it in the course of the duties of employment; and
• it is not made at a meeting which is held for the purpose of proposing suggestions.
Tax-free limit for encouragement awards - are capped at £25.
Tax-free limit for financial benefit awards - depends on the savings & number of awards.
The starting point is the suggestion maximum which is the financial benefit share or, if less, £5,000.
The financial benefit share is the greater of:
• 50% of the financial benefit that could reasonably be expected to result from the adoption of the benefit for the first year after its adoption; and
• 10% of the financial benefit that could be expected to result from its adoption in the first five years.
If no award has been made for the suggestion before, the tax-free limit is the suggestion maximum where one award is made or the appropriate proportion of the suggestion maximum if two awards are made on the same occasion to different people (for example 25% if an award is made at the same time to four people).
If further awards are made for the same suggestion, the tax-free limit is the remainder of the suggestion maximum if one such further award is made, or an appropriate proportion of the remainder of the suggestion maximum if two or more further awards are made.
Example - Two employees suggest replacing disposable cups with reusable cups. The suggestion will save £8,000 in year 1, and £10,000 pa thereafter. The financial benefit share is the greater of:
• £4,000 (50% of £8,000); and
• £4,800 (10% of £48,000 (savings in years 1 to 5 being £8,000 and 4 x £10,000))
As this is less than £5,000, the suggestion maximum is £4,800.
The maximum tax-free award that can be made to each employee is £2,400 (50% of £4,800).
Making Tax Digital for VAT – what records must be kept digitally
Making Tax Digital (MTD) for VAT starts from 1 April 2019. VAT-registered businesses whose turnover is above the VAT registration threshold of £85,000 will be required to comply with MTD for VAT from the start of their first VAT accounting period to begin on or after 1 April 2019.
Digital record-keeping obligations
Under MTD for VAT, businesses will be required to keep digital records and to file their VAT returns using functional compatible software. The following records must be kept digitally.
Designatory data - Business name - Address of the principal place of business - VAT registration number - A record of any VAT schemes used (such as the flat rate scheme)
Supplies made - for each supply made: - Date of supply - Value of the supply - Rate of VAT charged
Outputs value for the VAT period split between standard rate, reduced rate, zero rate and outside the scope supplies must also be recorded.
Multiple supplies made at the same time do not need to be recorded separately – record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
Supplies received - for each supply received: - The date of supply - The value of the supply, including any VAT that cannot be reclaimed - The amount of input VAT to be reclaimed.
If there is more than one supply on the invoice, it is sufficient just to record the invoice totals.
Digital VAT account
The VAT account links the business records and the VAT return. The VAT account must be maintained digitally, and the following information should be recorded digitally:
In addition, to show the link between the input tax recorded in the business' records and that reclaimed on the VAT return, the following must be recorded digitally:
The information held in the Digital VAT account is used to complete the VAT return using `functional compatible software’. This is software, or a set of compatible software programmes, capable of:
Functional compatible software is used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an API.
Getting ready - The clock is ticking and MTD for VAT is now less than a year away.
Overpaid tax? How to claim it back
There are various reasons why you may have paid more tax than you needed to for a tax year. For example, if you only worked at the start of the year, you may not have received all of your personal allowance. Alternatively, if your tax code was incorrect, maybe reflecting historic rather than current benefits in kind, more tax may have been deducted from your pay than you actually owed.
Tax overpaid through PAYE
After the end of the tax year HMRC perform a reconciliation, pulling together all the information that they have received from all sources to work out how much tax you should have paid for a tax year and looking at how much tax you actually paid. Where the two figures are not the same, HMRC will send out a P800 tax calculation or a PA302 simple assessment.
HMRC have started sending out P800 tax calculations and PA302 simple assessments for 2017/18. If you receive a calculation, it is important that you check it carefully – or ask your tax adviser to do so. HMRC do make mistakes!
If the calculation shows that you are due a refund, you can claim this online via your personal tax account (see www.gov.uk/check-income-tax-last-year). However, if you do not claim a refund within 45 days, HMRC will send you a cheque.
You can also claim a refund via your personal tax account if you have paid too much tax and HMRC have not sent a P800 calculation or PA302 simple assessment. If you are unsure whether you have paid too much, you can also check what you have paid online at www.gov.uk/check-income-tax-last-year.
If you are within self-assessment (for example, if you are self-employed or have other sources of income in addition to your job) and you have overpaid tax, HMRC will generally process the tax repayment once you have submitted your return. An overpayment may arise, for example, if your income is lower than the previous year and the payments on account exceed your liability for the year. In particular, if your income drops so that payments on account are not needed for the current year, a repayment may arise.
When completing the self-assessment tax return, you can provide HMRC with details of the bank account to which you would like any repayment to be sent. You can also request that any repayment is made by cheque. Alternatively, if you owe HMRC money, such as for VAT or to repay overpaid tax credits, you can opt to offset the overpayment against the outstanding liabilities.
You can also trigger the repayment online via your personal tax account; by logging in and checking the tax position and asking that the overpayment be repaid.
If the repayment is not received in a few weeks, you may wish call HMRC to chase it up.
Cash basis for landlords – when does it apply?
The cash basis simply takes account of money in and money out – there is no need to worry about debtors and creditors and prepayments and accruals. Income is recognised when received and expenditure is recognised when paid. Since 6 April 2017, the cash basis has been the default basis for eligible landlords.
An eligible landlord is one in respect of whom none of the tests A to E below is met.
Test A is met if the business is carried on at any time in the tax year by:
• a company;
• a limited liability partnership;
• a corporate firm;
• the trustees of a trust; or
• the personal representatives of a person.
A partnership is treated as a ‘corporate firm’ (and thus not eligible for the cash basis) if a partner in the firm is not an individual.
Test B is met if the cash basis receipts for the year exceed £150,000.
The cash basis receipts are those that are taken into account in working out the profits of the property business on a cash basis.
Where individuals who are married or in a civil partnership and who live together own property jointly, for income tax purposes, the income is split equally between them. Where a landlord receives a share of income from a jointly owned property and that income is being treated as arising to the joint owners in equal shares (for example where the property is owned with a spouse or civil partner) and the other joint owner uses the accruals basis to calculate their profits, the landlord must also use the accruals basis to calculate his or her profits.
Consequently, if one party is not eligible for the cash basis, the cash basis is not available to the other party in respect of the property business receiving a share of the joint income.
Test D is met if a Business Premises Renovation Allowance is made in calculating the profits of the business property business and a balancing event in the year would give rise to a balancing adjustment. Where this is the case, profits must be computed using the accruals basis.
Test E is only relevant where none of A, B, C or D is met.
Test E is that the landlord has opted out of the cash basis by electing for the accruals basis to apply.
Cash basis by default
The cash basis for unincorporated landlords will apply if none of the Tests A to D above are met and the landlord has not made an election for the accruals basis (Test E) to apply.
High Income Child Benefit Charge
The High Income Child Benefit Charge is effectively a clawback of child benefit paid to ‘high income’ individuals and couples. The charge does not only apply to the recipient of child benefit or the parents of the child in respect of whom child benefit is paid - it can also affect the partner of someone who receives child benefit, even if the child is not theirs.
In the context of the High Income Child Benefit Charge, a person has a ‘high income’ if they have individual income over £50,000 in the tax year. For these purposes, the measure of income is ‘adjusted net income’. Broadly, this is your total taxable income before taking account of personal allowance and items like Gift Aid.
When does the charge apply?
If you have adjusted net income of at least £50,000, the High Income Child Benefit Charge will apply in the following situations:
• you are entitled to child benefit for at least a week in the tax year and you do not have a partner with higher adjusted net income; or
• your partner is entitled to child benefit for at least a week in the tax year and your income is more than your partner.
Thus, in a couple where only one person had adjusted net income of more than £50,000, the High Income Child Benefit Charge will apply to that person, even if they do not receive child benefit or the child is not theirs. Where both partners have adjusted net income in excess of £50,000, the charge is levied on the partner with the highest income. Where the recipient does not have a partner, they will be liable for the charge if their income is more than £50,000.
Amount of the charge
The charge is 1% of the child benefit received in the tax year for every £100 by which the adjusted net income of the person liable for the charge exceeds £50,000. So, for example, if adjusted income is £57,000, the High Income Child Benefit Charge is 70% of the child benefit received.
Where adjusted net income exceeds £60,000, the charge is equal to the full amount of the child benefit paid in the tax year.
No equity in taxation
In determining whether the charge applies, the income of the individual is considered in isolation to assess whether it exceeds the £50,000 trigger point. Thus, a couple earning £49,000 each (£98,000 in total) escape the charge, whereas a single parent earnings £60,000 must repay any child benefit in full.
Further, the person liable to pay the charge may not be the person who received it, and consequently they are being taxed on income received by their partner – something that is rather contrary to the principles of independent taxation.
Where the High Income Child Benefit Charge applies in full, the recipient can opt not to receive the child benefit rather than receive it and pay it back. This can be done online or by contacting the Child Benefit Office.
HMRC have produced a child benefit calculator, which can be used to see if the charge applies and, if so, the amount of the charge. The calculator can be found on the Gov.uk website at www.gov.uk/child-benefit-tax-calculator.
Buy-to-let landlords – relief for interest
With rising property costs and low interest rates, many people took out a mortgage to invest in a buy-to-let property. As long as property prices continued to rise and the tenants paid their rent, investors could make money from the rising market while the rent from the tenant paid off the mortgage – all the investor needed was the deposit and to convince the bank to lend them the money.
Fast forward a few years and the buy-to-let star is not burning quite so bright. Second and subsequent properties now attract a 3% stamp duty supplement – making them more expensive to buy – and relief for mortgage interest and other costs is being seriously reduced.
Interest relief – the new rules
Prior to 6 April 2016, the rules were simple. In calculating the profits of his or her property business, the landlord simply deducted the associated mortgage interest and finance costs.
New rules apply from 6 April 2017, with changes being phased in gradually over a four-year period so as to move from a system under which relief is given fully by deduction to one where relief is given as a basic rate tax reduction. This changes both the rate and mechanism of relief. The changes do not apply to property companies – only unincorporated businesses.
What does this mean
Relief by deduction simply means deducting the amount of the interest, as for other expenses, in working out the profit or loss of the property business.
Where relief is given as a basic rate tax reduction, instead of deducting the interest in calculating profit, 20% of the interest is deducted from the tax calculated by reference to the profit (as determined without taking out interest for which relief is given as a tax reduction).
For 2017/18, a landlord can deduct in full 75% of his or her finance cost. The remainder is given as a basic rate tax reduction.
Freddie has a number of buy to let properties. In 2017/18, his rental income is £21,000, he pays mortgage interest of £5,000 and has other expenses of £3,000. He is a higher rate taxpayer.
Tax on his rental income is calculated as follows:
Rental income £21,000
Less: interest (75% of £5,000) (£3,750)
other expenses (£3,000)
Taxable profit £14,250
Tax @ 40% £5,700
Less: basic rate tax reduction
(20% (£5,000 x 25%)) (£250)
Tax payable £5,450
This compares to a tax bill of £5,200, which would have been payable had relief for the interest been given in full by deduction.
The pendulum swings gradually from relief by deduction to relief as a basic rate tax reduction. In 2018/19, relief for half of the interest and finance costs is by deduction and relief for the other half is as a basic rate tax deduction. In 2019/20, only 25% of the interest and finance costs are deductible, relief for the remaining 75% being given as a basic rate tax reduction. From 2020/21 onwards, relief is only available as a basic rate tax reduction.
Use of home as office
Use of home as office is a catch-all phrase to describe the costs that a self-employed businessperson has in running at least part of their business operations from home. It need not be an office as people may use a spare bedroom to hold stock for assembly and postage, or similar.
Many will have used the figures that HMRC has long published for employees’ ’homeworking expenses’ - initially £2 a week, then £3 a week, changing to £4 a week from 2012/13.
From 2013/14 onwards HMRC has adopted the following rates:
Hours of business use per month 25-50 flat rate per month £10
Hours of business use per month 51-100 flat rate per month £18
Hours of business use per month 101+ flat rate per month £26
So in HMRC’s eyes, I am entitled to a deduction of £120 a year for the use of home office space (or similar), but basically only so long as I spend at least 25 hours a month working from home. Working more than 25 hours a week - broadly full time - from home gets me the princely sum of £312 per year.
Working from home may be cheap, but it’s not that cheap.
The following guidance assumes that the claimant is not using the cash basis of assessment for tax purposes, as the rules work differently.
'Wholly and exclusively’ - Business expenses are allowed if incurred 'wholly and exclusively for the purposes of the trade'. This is a cardinal rule; however, there is a further point:
'Where an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade’ (ITTOIA 2005, s 34).
Applying these principles, I do not have to use a room in my house exclusively for my self-employment, just so long as when I am using it for business purposes, that is all it is being used for.
The costs you are allowed to claim - It is worth bearing in mind that HMRC does have guidance on how to make a more comprehensive claim for using one’s home in the business, in its Business Income manual however you may find it strange that almost all of the examples result in a claim of around £200 a year or less!
HMRC’s guidance nevertheless includes the following potentially allowable costs:
If you incur appreciable costs on the above then just £120 a year as a standard use of home deduction, or even £312 a year, is likely to make you feel more than a little aggrieved.
Inheritance Tax and potentially exempt transfers
It is possible to make gifts during your lifetime free of Inheritance Tax (IHT), as long as you live for more than seven years after making the gift. Most lifetime transfers are ‘potentially exempt transfers’ (PETs). They have the potential to be free of IHT as long as the donor survives seven years after making the gift. It is assumed at the time that the gift is made, that it will remain exempt; consequently, no IHT is payable at the time that the gift is made.
However, should the donor die within the seven-year period, the PET becomes a chargeable transfer at the date of the gift. This may mean some reworking if the donor has also made chargeable transfers after making the PET.
Example - Alfred gives each of his three daughters a cheque for £10,000. As a result of the gifts, the value of his estate is reduced by £30,000. The gifts are PETs at the time that they are made.
Donor dies within seven years - In the event that the donor dies within seven years of the date of the gift, the PET becomes a chargeable transfer at the time that the gift is made, and is taken into account working out the IHT, if any, due on the estate. The transfer forms part of the cumulative estate and must be cumulated with the death estate and any subsequent lifetime transfers. The death of the donor may trigger an IHT charge on the PET as it is also cumulated with previous transfers.
14-year window - Although the donor only needs to survive seven years for the PET to remain exempt, should he die within this period, it is also necessary to look at transfers in the seven years before the PET to see whether the failed PET was covered by the nil rate band at the time it was made. Hence, it may be necessary to consider a transfer window of up to seven years.
Taper relief - Taper relief reduces the amount of IHT payable on the gift – not the value of the gift. The amount of IHT payable depends on the period of time that has elapsed between the gift and the donor’s death.
Period between chargeable gift and donor’s death IHT payable
Up to 3 years 100%
More than 3 years and up to 4 years 80%
More than 4 years and up to 5 years 60%
More than 5 years and up to 6 years 40%
More than 6 years and up to 7 years 20%
Annual exemption - There is a £3,000 annual exemption for gifts.
Example - Julie gave £200,000 to her daughter Alice on 22 May 2012 on her 21st birthday and a further £200,000 to her son Henry on 3 February 2014 on his 21st birthday. Julie died on 16 April 2018, leaving her estate, valued at £500,000, to her husband Robert.
The transfer of value to her husband is an exempt transfer. However, as she died within seven years of making the gifts to her children, they become chargeable transfers.
The gift to Alice uses up the first £197,000 of her nil rate band of £325,000 (£200,000 gift less annual exemption of £3,000). The remainder of the nil rate band is available to set against the gift to her son (a chargeable transfer of £197,000 (£200,000 less annual exemption of £3,000)).
As only £128,000 of the chargeable transfer to her son is covered by the nil rate band, the remaining £69,000 is chargeable to inheritance tax. However, as the gift was made more than 4 years but less than 5 years before Julie’s death, taper relief applies. The IHT payable is therefore 60% (£69,000 @ 40%) = £16,560.
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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd. Registered in England No. 05770414.
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